Loan-to-Deposit Ratio
IntermediateThe loan-to-deposit ratio compares a bank's total loans with its total deposits. It shows how much of the money deposited with the bank has been lent out.
The ratio is calculated by dividing total loans by total deposits. If a bank has 800 million of loans and 1,000 million of deposits, its loan-to-deposit ratio is 80%.
The ratio gives a quick view of a bank's liquidity and funding. A ratio well below 100% means the bank funds its loans comfortably from deposits and has spare funds, often held in liquid assets such as government bonds. A ratio above 100% means the bank lends more than it takes in deposits and relies on other funding sources, such as borrowing in wholesale markets, which can be less stable and more expensive.
There is a balance to strike. A very low ratio may mean the bank is not using its deposits to earn as much as it could. A very high ratio may mean it is overstretched and vulnerable if its other funding becomes harder to obtain.
Regulators and analysts use the loan-to-deposit ratio alongside more detailed liquidity measures to judge how well a bank could cope with withdrawals or funding stress.
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